Trump Has The Stock Market and Fed Cornered

The stock market selloff continues amid the escalation of the trade wars between the U.S. and 180 other countries, and it’s left investors asking the questions:

• Where is the bottom?

• Are we headed for a recession?

Unfortunately, the answers are largely rooted in the decisions that President Trump makes in the coming days and weeks. There have been talks about the Fed decreasing rates, tax reform getting passed sooner, and negotiations beginning with 50 of the 180 countries that we placed tariffs on. In this article, we are going to explain why all of these solutions may be too little too late when it comes to the overall negative impact that tariffs are currently having on the U.S economy. 

Trump Holds All of the Cards

In our opinion, the only way out of this market selloff is a policy pivot by the Trump administration on the latest round of tariffs - which could be announced ant any moment. Markets would likely respond very positively to any sign of relief. This could come in the form of a “pause” in the assessments of the tariffs for a specific number of days to provide time for negotiations to take place, or the Trump administration could reverse course, either walking back or reducing the tariff amounts that are currently being assessed.

Notice that I didn’t add to the list that “tariffs are either eliminated or reduced by successfully negotiating with 180 countries on which tariffs have been placed.”  While this would typically be an option, we do not believe that the Trump administration has the manpower to successfully negotiate with 180 countries simultaneously in a way that would reduce or eliminate the tariffs before they negatively impact the global economy. 

The magnitude of the tariff is a real problem, and we believe this to be one of the big missteps by the Trump administration in trade negotiations.  The reciprocal tariffs are not based on the tariffs that are being levied against U.S. goods being imported by other countries, but rather a formula by the Trump administration that’s based on the trade deficit between the U.S. and these various countries, which is not prudently resolved through the assessment of tariffs. 

For example, let's say that Japan assesses a 5% tariff against U.S. imports. Since the U.S. imports more from Japan than Japan imports from the U.S., this results in a trade deficit between the two countries.  The Trump administration has decided not to levy a reciprocal tariff based on the 5% actual tariff levied against U.S. goods but rather is assessing a much larger tariff based on the amount of the trading deficit between the U.S. and Japan. However, this might not be the root cause of the trade imbalance. Another example: let's say the U.S. consumer prefers buying Japanese electronics, but there aren’t naturally many things that Japan buys or needs from the U.S. This would cause exports from Japan to exceed imports from the U.S., which is being driven largely by consumer demand, not tariffs.  However, the Trump administration is now assessing sizable tariffs against Japan to try to reduce the trade deficit. In effect, this approach either forces Japan to buy more goods from the U.S. or for the U.S. consumer to buy less goods imported from Japan - even those products are preferred for their quality over alternatives from other countries.

In a way, the Trump administration is trying to use a hammer to fix a problem that requires a screwdriver.  In addition, it was recently pointed out on an analyst call that since the United States spends more than it makes, we are naturally going to run deficits with other countries because we're purchasing more than we produce as a country. If we are concerned with the U.S. trade deficits, and although tariffs may be a contributing factor, the lion’s share of the problem may be the U.S. just outspending what we produce each year.

Tariffs are Paralyzing the Global Economy

While we have seen the tariffs being implemented this week, just the threat of tariffs has a paralyzing impact on both the U.S. and global economy.  Since there is so much at stake in the negotiation of these tariffs, it causes companies to put off purchasing decisions, hiring decisions, new construction, and encourages companies to sit on their cash, not knowing which direction the economy will go from here.

Not only do we need a pause, delay, or elimination of the tariff to stave off a recession, but it needs to happen within a reasonable period of time, because the reduction in spending by consumers and businesses during this wait-and-see approach is already reducing the GDP in Q2, which could push the QDP negative in Q2 and potentially Q3.  Two consecutive quarters of negative GDP is a recession.

Delay In Building New Factories

While the Trump administration's main goal with the trade negotiations is to bring more manufacturing back to the United States, these are multibillion-dollar decisions for these publicly traded companies.  For example, it’s estimated that if Apple were to move forward with building a new multi-billion facility in the U.S., it might take them 10 years to build it.  The catalyst for building it in the first place would be to avoid having to pay the tariffs on iPhones that are being imported from China.  But if you're Apple, do you commit to spending billions to build a new factory in the US when in 4 years there could be a change in the administration in Washington and then the tariffs could be removed, making it no longer prudent to produce hardware in the United States?  These are the decisions that these big multinational companies face before pulling the trigger on bringing manufacturing back to the United States. 

Labor Shortage

Another reasonable question to ask is if all these manufacturing jobs come back to the United States, do we have enough workers to hire in the U.S. to run those factories?  The unemployment rate in the U.S. is 4.2%, which is well below the 6% historical trend.  With the Trump administration greatly limiting immigration into the U.S., it’s difficult to pinpoint where all these additional workers would come from within the U.S.

The Fed is Stuck

The Fed is stuck between a rock and a hard place.  Normally, when there is weakness in the U.S. economy, the Fed will step in and begin lowering interest rates. However, tariffs are inflationary, so if the Fed begins reducing rates to help the economy while prices are moving higher because of the tariffs, it could result in another round of hyperinflation like we saw coming out of COVID.  This may cause the Fed to stay on pause, meaning the markets may not receive any immediate help from the Fed in the near future.

Tax Reform

There is also the argument to be made that weakening the U.S. economy may allow larger tax cuts to be passed with the anticipation of the Trump tax cuts that are currently working their way through Congress.  While this may very well be true, again, it’s a timing issue.  Tax reform is a slow-moving animal, and even in the best-case scenario, we may not see the tax reform passed until August 2025 or later, but by then the U.S. economy could already be in a recession if the tariff issues are not resolved.

Waiting For the Recovery

The economy is truly balancing on the edge of a knife right now.  An announcement at any moment from the Trump administration indicating a pause or reduction of the tariff could make the last few weeks just a bad dream. But it’s not just that relief happens, but that the U.S. economy likely needs to receive that relief soon to avoid too much damage from happening due to the economic paralysis in the interim.  There are very few moments in history where so much is riding on policy coming out of Washington that it becomes difficult to predict which path the U.S. economy will follow in coming weeks and months. This is truly a situation where investors will have to assess the data each day and what the developing trends in the economic data are to determine whether or not changes should be made to their asset allocation. 

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Trump Tariffs 2025 versus Trump Tariffs 2017 to 2020: The Stock Market Reaction

President Trump just announced tariffs against Canada, Mexico, and China that will go into effect this week, which has sent the stock market sharply lower.  I have received multiple emails from clients over the past 24 hours, many asking the same question:

“With the Trump tariffs that were just announced, should we be going to cash?”

Investors have to remember that we have seen Trump’s tariff playbook during his first term as president between 2017 and 2020, but investors' memories are short, and they forget how the stock market reacted to tariffs during his first term.   While history does not always repeat itself, today we are going to look back on how the stock market reacted to the Trump tariffs during his first term, how those tariffs compare in magnitude to new tariffs that were just announced, and what changes investors should be making to their investment portfolio.

Trump Tariffs 2017 – 2020

During Trump’s first term as president, he introduced multiple rounds of tariffs, including the tariffs in 2018 on solar panels, washing machines, steel, and aluminum.  The tariffs were levied against Canada, Mexico, and the European Union.   Throughout his first term, he also escalated tariffs against China, which led to the news headlines of the trade war during his first four years in office.

How did the U.S. stock market react to these tariff announcements?  Similar to today, not good.  There were sharp selloffs in the stock market in the days following each tariff announcement, but here were the returns for the S&P 500 Index during Trump’s first term in office:

2017:    21.9%

2018:   -4.41%

2019:    31.74%

2020:   18.38%

If we are looking to history as a guide, the first round of Trump tariffs created heightened levels of volatility in the markets, financially harmed specific industries in the U.S., and raised prices on various goods and services throughout the US economy. In the end, despite all of the negative press about the tariffs and trade wars, the U.S. stock market posted solid gains in 3 of the 4 years during Trumps first term as president.

The Trump Tariffs Are Larger This Time

However, we also have to acknowledge the difference between the tariffs that were announced in Trump’s first term and the tariffs that were just announced on February 2, 2025.  The tariffs that Trump just announced are dramatically larger than the tariffs that we imposed during his first term, which could translate to a larger impact on the U.S. economy and higher prices.  During his first term, Trump was very strategic as to which types of goods would be hit with the tariffs, but the latest round of tariffs is a 25% tariff on ALL goods from Canada and Mexico (with the exception of oil) and a 10% tariff on goods coming from China.

Negotiating Tool

Trump historically has used tariffs as a negotiating tool.  During his first term, there were multiple rounds of delays in the tariffs being implemented as trade terms were negotiated; that could happen again. Even if the tariff is implemented this week, it’s tough to estimate how long those tariffs will stay in place, if they will be reduced or increased in coming months, and since they are so widespread this time, which industries in the US will get hit the hardest in this new round of tariffs.

U.S. Unfair Advantage in the Tariff Game

While the trade war / tariff game hurts all countries involved because it ultimately drives prices higher on specific goods and services, investors have to acknowledge the advantage that the United States has over other countries when tariffs are imposed.  The U.S……by FAR…..is the largest consumer economy in the WORLD, so when we put tariffs on goods coming into our country, the US consumer historically will begin to shift their buying habits to lower-cost goods or buy less of those higher-cost items.

While the US consumer feels some pain from the impact of higher costs on the imported goods being tariffed, the pain is 3x or 5x for the country that tariffs are being imposed on because it’s immediately impacting their sales in the largest consumer economy in the world.   This is why Trump has identified tariffs as such a powerful negotiating tool, even if the action that the president is trying to resolve has nothing to do with trade.

Investor Action

While the knee-jerk reaction to the tariff announcement may be to run for the hills, in our opinion, it’s too soon to make a dramatic shift in investment strategy given the opposing forces of the possible outcomes to the stock market beyond the initial reaction from the stock market. On the positive side of the argument, the stock market reacted similarly to the tariff announcements during his first term but still produced sizable gains throughout that four-year period.  We don’t know how long these tariffs may be in place, they may not be permanent, or they may be reduced as negotiations progress. Third, the U.S. economy is healthy right now and may be able to absorb some of the negative impact of short-term price increases from the tariffs.

On the other side of the argument, the tariffs are much larger this time compared to Trump’s first term so it could have a larger negative impact. Also, the tariffs this round are broader versus the more surgical approach that he took during his first term, which could negatively impact more businesses in the US than it did the first time.  Third, the retaliatory tariffs by Canada, Mexico, and China could be larger this time, which again, could have a larger negative impact on the U.S. economy compared to the 2017 – 2020 time frame.

The word “could” is used a lot in this article because the tariffs were just announced, and there are so many outcomes that could unfold in the coming months.  When counseling clients on asset allocation, we find it prudent to hold off on making dramatic changes to the investment strategy until the path forward becomes clearer, even though it’s very tempting to want to react immediately to the events that trigger market sell-offs.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.